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1042-2587

Copyright 2004 by
Baylor University

E T&P

The Role of Mental


Simulations and
Counterfactual Thinking
in the Opportunity
Identification Process*
Connie Marie Gaglio

The process of identifying, shaping, and pursuing market opportunities is emerging as a


focal point in the field of entrepreneurship. Scholarly efforts to date have considered what
happens during this process; it is time to turn attention to how and why. This article examines one such how question: how do entrepreneurs think and reason such that they identify innovative opportunities? Specifically, the cognitive processes of mental simulation and
counterfactual thinking are proposed as mechanisms by which entrepreneurs identify and
develop innovative opportunities. Propositions regarding the application of these cognitive
processes to opportunity identification are presented and discussed.

Introduction
You see things and you say Why? But I dream things that never were and I say,
Why not? (Shaw, 1922). Dreaming of things that do not yet exist, bringing them into
creation and gaining market acceptance are perhaps the most mesmerizing of all entrepreneurial behaviors. Certainly, they represent the foundation for modern conceptualizations of entrepreneurship (Stevenson & Gumpert, 1985) whether dramatically depicted
as creatively destroying existing industries (Schumpeter, 1950, p. 8) or more humbly
characterized as the motivated propensity of man to formulate an image of the future
(Kirzner, 1985, p. 56). The process of identifying and shaping market opportunities is
emerging as a focal point for the field of entrepreneurship (Gaglio, 1997b; Kirzner, 1979;
Shane & Venkataraman, 2000; Venkataraman, 1997).
Early work in this area focuses on developing a comprehensive description regarding the nature of the process: is it serendipitous or systematic (Koller, 1988; Vesper,
1980)? Do opportunities appear full-blown like Athena from the head of Zeus, or do they
emerge over time (Hills, 1995; Long & McMullan, 1984)? When looking for ideas, are
some places better than others (Christensen, 1989; Long & Graham, 1988; Peterson,

Please send correspondence to: Connie Marie Gaglio at cmgaglio@sfsu.edu.


* Portions of this manuscript were first presented at the UIC/AMA Annual Research Symposia on Marketing and Entrepreneurship, Nice, France, June 1999.

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1988)? Is there a difference between good ideas and opportunities (Hulbert, Brown, &
Adams, 1997; Timmons, 1994)? The answer to all these questions is yes. At the very
least, one can find anecdotal evidence to support any answer for any of these questions.
It appears that the fundamental nature of the opportunity identification process is
extremely diverse.
An emerging perspective shifts attention from the nature of the process toward its
underlying dynamics. This perspective, entrepreneurial alertness, proposes that entrepreneurs perceive and reason in markedly different ways from other business people and
these differences lead to the identification of innovative business opportunities first
(Kirzner, 1979, 1985). There is some empirical evidence to support the claim that entrepreneurs do indeed think and reason differently with regard to opportunities (Gaglio,
1997a; Kaish & Gilad, 1991). These findings are consistent with other data indicating
that the processes and products of entrepreneurial cognitions differ (e.g., Busenitz, 1999;
Palich & Bagby, 1995; Simon, Houghton, & Aquino (1999). Not surprisingly, interest in
the potential of entrepreneurial cognition for understanding entrepreneurial behavior is
growing (e.g., Baron, 1998; Gaglio & Katz, 2001).
Preliminary evidence suggests that cognitive heuristics may play a key role in entrepreneurial cognition and therefore merit vigorous investigation. To date, much of the
work regarding cognitive heuristics has tended to focus on the ways in which cognitive
processes introduce bias and error into entrepreneurial reasoningat least when compared to the normative model of rational decision making (e.g., Busenitz, 1999; Simon
et al., 1999). The unstated implication is that this flawed reasoning may be associated
with venture failure. However, the judgment and decision-making literature also notes
that cognitive heuristics can have positive effects (e.g., Kahneman & Tversky, 1982) and
can facilitate successful entrepreneurial activity.
The purpose of this article is to delineate the ways in which two cognitive heuristics,
mental simulations and counterfactual thinking, may guide entrepreneurial reasoning and
enhance the opportunity identification process. The article begins with a brief review of
the cognitive dynamics associated with the opportunity identification process as described
in the theory of entrepreneurial alertness. Then, the process and dynamics of mental
simulations and counterfactual thinking are presented and applied to the opportunity
identification process. Propositions regarding entrepreneurial opportunity identification
cognitive behaviors are presented. Finally, additional implications for entrepreneurship
theory and research are discussed.

Entrepreneurial Alertness and Opportunity Identification


Although many in the discipline use the term opportunity to mean the chance to
start a business (e.g., Hills, Shrader, & Lumpkin, 1999; Long & McMullan, 1984), this
article follows the tradition established by the disciplines leading theorists (Schumpeter,
1950; Kirzner, 1979) and defines opportunity to mean the chance to introduce innovative (rather than imitative) goods, services, or processes to an industry or economic
marketplace.

Entrepreneurial Alertness
The theory of entrepreneurial alertness (Kirzner, 1979, 1985), summarized here,
presumes that the driving force of all economic activity is decision makingusually, a

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ENTREPRENEURSHIP THEORY and PRACTICE

decision about optimal resource allocation that maximizes return on investment. But in
order to make optimal allocation decisions, one needs to know the context or framework
that indicates the rules of the game (causal chain), the appropriate resources (means), and
the index of value (ends). In real life, this context or means-ends framework is in constant flux, responding to numerous regulatory, economic, social, and technological
changes. The quality of the decision making depends on what individuals make of these
changes (see Figure 1). Kirzner argues that some people (i.e., entrepreneurs) possess a
special alertness that predisposes them to be extremely sagacious about change: they are
quicker to detect its signals; more accurate in sizing up its true significance; quicker to
infer the full scope of its implications; and most important, more accurate in uncovering
its commercial potential. Those who do not perceive the signals of change or misinterpret their meaning and implications do not identify innovative opportunities early enough
to capitalize on them.
Therefore, an individuals reaction to changing circumstances is pivotal. A person
can perceive and interpret the situation or event as either normal or as unusual. If the perception and interpretation is that things are normal, then decisions are simply a question
of optimal resource allocation (Figure 1). Insights about ways to improve the efficiency
of return on those allocations may lead to the identification of imitative or incremental
market opportunities. However, perception and interpretation of an event as unusual
(whether positive or negative) prompts sensemaking rather than decision making. In some
instances, as alert entrepreneurs assess changing circumstances, they feel they cannot
ignore or discount what is happening and come to realize that it is no longer a question
of optimal resource allocation but really a question of whether the existing way of doing
things (i.e., the existing causal chain or the existing means-ends framework) still works.
Kirzner (1979) considers this realization, hereafter referred to as breaking the existing
means-ends framework, to be the quintessential entrepreneurial behavioral. When appropriate, alert entrepreneurs are willing to abandon the existing means-ends framework and
develop new ones that represent their best guesses about the future. These guesses or
visions, are realized as innovative products, services, or processes that then compete with
existing products, services, and processes (i.e., the existing means-ends framework) as
well as with alternatives offered by other entrepreneurs.
The identification or discovery of innovative opportunities, then, involves breaking
the existing means-ends frameworks and creating alternative ones. Consequently, an
explanation of the opportunity identification process from the alertness perspective must
provide explanations for two key questions: how does the entrepreneur achieve the insight
that the existing means-ends framework may no longer be appropriate; and how does the
entrepreneur develop alternative frameworks? Kirzner stipulates several requirements
regarding perception and reasoning that presumably lead to insights about the need to
break the existing means-ends framework; these requirements are summarized by the
concepts of veridical perception and veridical interpretation (Gaglio, 1997b). Veridical
perception requires that the entrepreneur perceive the changing situation accurately and
not be susceptible to the kinds of distortions that can arise from the uncertainty that
change can produce. Veridical interpretation involves correctly determining the real
causes for the change and correctly inferring their practical, social, and commercial implications while avoiding the delusion of seeing possibilities where none really exist.
The identification of such skills is an important step but it does not really represent
an explanation. Given the emphasis on perception and reasoning, it is rather curious that
the theory of entrepreneurial alertness does not consider how alert entrepreneurs actually
break existing means-ends frameworks or how they develop useful alternatives. Kirzner

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ENTREPRENEURSHIP THEORY and PRACTICE

existing
means-ends
framework

causal chains

how thing scan


be related

industry,
market, society
rules of the game

Knowledge About
Status Quo

Something unusual,
unexpected or
anomalous

veridical perception
veridical interpretation

Whats really going on here?

Alertness Chronic Schema

Market
Situation
or
Event

Things appear to be
usual, expected

Alertness and the Opportunity Identification Process

Figure 1

industry
market
society
etc.

How does it
affect:

Discount

Ignore

Break
Status Quo
or
Existing
Means-Ends
Framework

Allocate
Resources
Using
Mini-Max
Rule

Maintain
Status Quo
or
Existing
Means-Ends
Framework

Innovative
Opportunities

Incremental
Opportunities

Imitative
Opportunities

Continue
as is

simply assumes that this crucial cognitive work is performed and asserts that entrepreneurs do it faster. However, entrepreneurship scholars cannot accept such black box
assumptions if opportunity identification is to be a focal point for the discipline and its
advancement.
When Gaglio and Katz (2001) considered the plausibility of the theory of entrepreneurial alertness, they noted these theoretical gaps and argued that it may be possible to
address them by considering alertness to be heuristically driven. Specifically, they proposed a chronic alertness schema as the heuristic driving an awareness that the existing
means-ends framework may be inappropriate. Mental simulations and counterfactual
thinking were proposed as the heuristics by which the existing means-ends frameworks
are broken and alternative frameworks developed. The idea that the opportunity identification process is heuristically driven is especially attractive for proponents of entrepreneurial alertness because the use of heuristics would not only account for the theoretical
gaps but would also explain why entrepreneurs may identify or discover opportunities
before anyone elseheuristics typically speed cognitive processing as well as minimize
cognitive load (Tversky & Kahneman, 1974). The next section explores the nature and
dynamics of mental simulations and counterfactual thinking and elaborates on how they
work in the opportunity identification process.1

Mental Simulations and Counterfactual Thinking


As noted earlier, the perception and interpretation of an event as unexpected (whether
positive or negative) typically prompts sensemaking and problem-solving activity. One
of the most common ways in which we make sense of events is through the use of mental
simulations, particularly counterfactual thinking (Kahneman, 1995; Lundberg & Frost,
1992; Olson, Roese, & Diebert, 1996). These tools can be employed in a wide variety of
situations and help us anticipate the future as well as learn from past mistakes (Roese,
1994; Sanna, 2000; Taylor & Pham, 1996). The form and direction that these simulations
and counterfactuals take influence whether a person can break the existing means-ends
framework, develop alternatives, and identify innovative market opportunities.

Mental Simulations
Mental simulations are defined as imitative cognitive constructions of an event or
series of events based on a causal sequence of successive interdependent actions (Sanna,
2000; Taylor et al., 1998; Taylor & Schneider, 1989). In short, we mull over what will
happen or has happened in a given situation. This kind of thinking is a natural part of
everyday life. For example, an entrepreneur will simulate one possible future by mentally rehearsing his or her sales pitch along with answers to possible objections while
driving to a client meeting. An especially prepared entrepreneur will also mentally
rehearse what he or she will do should PowerPoint fail during the pitch. Upon encountering a traffic delay, the entrepreneur will imagine alternative routes and quickly choose
the most viable. On the drive home, he or she will mentally simulate the past by recalling a play-by-play version of the meeting and perhaps even altering the causal sequence
of the meeting by deleting what was said and inserting what should have been said! As
1. Those interested in developing the area of entrepreneurial cognition will appreciate the irony that the very
act of thinking and writing the section is itself an example of these heuristics at work.

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537

will be shown later, changing the causal sequence is an example of the type of mental
simulation called counterfactual thinking.
Function. The ability to mentally simulate past and future alternatives to reality is
believed to serve two functions (Roese, 1994; Sanna, 2000; Taylor & Pham, 1996; Taylor
& Schneider, 1989) that are not mutually exclusive. The first function, affective, allows
emotions to be re-experienced and processed; this facilitates the ability to cope with an
event, regulate emotional responses, or restore self-esteem. For example, if, while our
entrepreneur anticipates or recalls the sales meeting, he or she simply vents his or her
frustration or imagines ways in which the meeting could have been worse, the affective
function is most evidentour entrepreneur is trying to find a way to feel better.
The second function mental simulations serve, the preparative function, enables us
to anticipate physical and social environments and to imagine strategies and tactics that
would lead to the achievement of our goals, motives, or purpose. It allows us to prepare
different behavioral responses and by imagining what each response may produce, choose
the one we think will most likely result in achieving our goal. Demonstrations of this
function occurred several times in our example: first, when the entrepreneur mentally
rehearsed the sales pitch, handling objections before meeting with the client, and later
when the entrepreneur recalls the meeting in detail, noting what worked and what did
not work. If, when imagining what should have been said, the entrepreneur changes his
or her wording to develop better responses to objections or a better way to close the deal,
then he or she is attempting to improve and prepare for future performance by learning
from mistakes.
A less obvious but equally significant dimension of the preparative function is the use
of mental simulations as a heuristic to estimate probability and causality. Kahneman and
Tversky (1982) note that an individual tends to judge the probability of an event based
on the ease with which he or she is able to roughly imagine the causal sequence that might
bring it about. The easier it is to imagine (mentally simulate) an event, the more likely it
is; the more difficult it is to imagine, the less likely. Numerous studies document the use
of the simulation heuristic in planning and decision making (see Johnson & Sherman,
1990 for a comprehensive review of these data). As will be shown later, the use of mental
simulations to estimate the likelihood of causes and outcomes plays an important role in
breaking the means-ends framework and developing alternative causal chains.
Dynamics. The fundamental dynamic for running mental simulations is deceptively
simple: the basic strategy involves contrasting reality (what is or what was) with a mental
image of what might have been or what could be (Sanna, 2000). To do this, one simply
changes, alters, or mutates something in the chain of events. The change can be accomplished in a variety of ways, such as by changing the amount or degree of some element,
deleting it altogether, substituting something else entirely different, leaving the original
element in but adding more elements, and so on. Obviously, the effectiveness of alterations would depend on two assessments: the identification of the appropriate causal
sequence for what was or what is and the identification of the appropriate causal sequence
that will produce the desired future outcome. Some casual sequences are obvious and
well known (e.g., eating quells hunger) but for most events in complex physical and social
worlds, the best one can do is to make educated guesses, technically known as judgments
under uncertainty (e.g., a good sales pitch may lead to a sale). Counterfactual thinking
(e.g., when our entrepreneur mentally changed his or her responses by imagining what
should have been said) is an effective cognitive heuristic for identifying causal sequences
and developing those guesses.
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ENTREPRENEURSHIP THEORY and PRACTICE

Counterfactual Thinking
Definition. Counterfactual thinking quite simply means thinking in a way that is contrary to existing facts (Roese, 1997; Seelau et al., 1995). However, cognitive psychologists (Markman & Weary, 1996; Roese, 1994; Roese & Olson, 1993; Swain, 1978) further
define these contrary thoughts as logical statements that stipulate the cause, or antecedent,
and the effect also called the consequent or outcomein other words, these are statements about a means-ends framework. Counterfactual thinking is a useful heuristic for
developing educated guesses about causal sequences because it explicitly focuses on
causal connections: what must change (and how) in order to cause a different outcome.
Activation. The counterfactual thinking process, like other mental simulations, can be
conceptualized in terms of three sequential stages: activation, construction and evaluation (Dunning & Madey, 1995; Roese & Olson, 1995b). An individual activates the
process of counterfactual thinking in response to some kind of stimulus. The stimulus
can be real or imagined, internal to the person or external in the environment. Surprise
or anything unexpected is believed to be the most common trigger (Kahneman, 1995;
Kasimatis & Wells, 1995). If so, then it would seem plausible that an alert entrepreneur
who, by definition, has a heightened sensitivity to the unusual or unexpected (Gaglio &
Katz, 2001; Kirzner, 1979) will naturally activate the counterfactual thinking process,
probably more often and earlier than nonalert individuals. Farris and Revlin (1989) may
offer some empirical support for these assertions from their study of how people detect
or discover rules or patterns in uncertain or ambiguous situations. The investigators found
that those individuals who were able to discover the rules of the experiment tended to
engage in counterfactual thinking sooner than those who failed to discover the correct
rules. Furthermore, the discovery group tended to generate significantly more counterfactuals than the other group; indeed, the simple percentage of counterfactuals generated
was the best predictor of discovering the correct rules in the experiment.2
Proposition 1: When confronted with the surprising or unexpected, opportunity
finders will engage in counterfactual thinking sooner than nonfinders.
Proposition 2: Opportunity finders generate more counterfactuals than nonfinders
do.
While alert entrepreneurs may respond to change or surprise earlier, it is important
to note that nonalert individuals are not completely oblivious to what is going on. It may
take them longer to recognize such instances but when they encounter something unexpected in ways that are clearly and persistently signaled, even the most nonalert eventually adapt (Fiske, 1993). Research indicates a tendency among corporate managers to
discount the meaning of change signals (Cowan, 1986), usually by seeing the changing
circumstance as an exceptional, isolated event while the entrepreneurially alert see it
as part of an emerging pattern of events (Johnson, Jamal, & Berryman, 1991). These
different perceptions may influence the form their counterfactual thinking takes, which
is important because each form, automatic and elaborative, tends to deal with change
in substantively different ways.

2. Propositions are constructed in terms of opportunity rather than entrepreneurship because, as noted earlier,
the definition of opportunity is limited to the identification of innovative products, services, or processes.
Entrepreneurship includes much more, such as decisions regarding the pursuit of opportunities, methods of
implementation, and managementall of which are extremely important, but beyond the scope of this article.

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Form: Automatic versus Elaborative Counterfactual Thinking. From a psychological


perspective, automatic means unintentional or without conscious direction (Bargh,
1984; Roese, 1997). Automatic counterfactual thinking is a spontaneous reaction, usually
to a surprise (Kahneman, 1995; Olson et al., 1996), particularly a negative or undesirable one. Most empirical research in psychology focuses on automatic counterfactual
thinking (Kasimatis & Wells, 1995; Roese, 1994, 1997; Roese & Olson, 1995b), particularly those instances involving regret, because such thinking can be easily induced and
its ubiquity precludes accusations about hothouse methodology.
The empirical evidence about automatic counterfactual thinking indicates a tendency
to undo unexpected outcomes by altering the unusual or exceptional antecedents
(Dunning & Parpal, 1989; Roese, 1994). This strategy may expand beyond regret and
may be one of the cognitive mechanisms used in discounting: undoing an unusual
antecedent should restore things to normal (see Figure 2).
Baron (1999) demonstrates that entrepreneurs are not likely to engage in counterfactual thinking associated with regret and he extends this finding to assert that entrepreneurs are less likely to engage in counterfactual thinking. However, such a conclusion
may be a bit premature. While entrepreneurs may not engage in automatic counterfactual thinking that ameliorates regret, their behavior regarding other forms of counterfactual processing, particularly elaborative counterfactuals is unknown and indeed, may be
quite likely.
Elaborative counterfactual thinking is intentional, deliberate, and consciously
directed. It too can be recruited in order to make sense of surprising or unexpected events
(Markman et al., 1993; Kasimatis & Wells, 1995; Wells & Gavanski, 1989) but unlike
the automatic form, elaborative counterfactual thinking seems more directed toward the
preparative function. In fact, Kahneman (1995) argues that elaborative counterfactual
thinking most clearly demonstrates how mental simulations help us anticipate or prepare
for the future because one deliberately constructs and evaluates alternative sequences of
actions and outcomes. This style of thinking would prove useful to those people who
interpret an unusual event to be part of a new emerging pattern (Figure 2) because in
order to infer a pattern, one would need to be able to mentally maintain the unusual
antecedent and to imagine how the existence of the unusual antecedent will affect the
rest of the causal chain, as well as to imagine a causal sequence that produces the unusual
antecedent. Therefore, during the opportunity identification process, one would expect
elaborative counterfactual thinking to play a more important role when making sense of
an unexpected or surprising event because attention becomes focused on generating alternative causal hypotheses, rather than just regretting an unusual circumstance.
Proposition 3: Opportunity finders are more likely to engage in elaborative counterfactual thinking while nonfinders are more likely to engage in automatic counterfactual thinking.
Proposition 4: Opportunity finders generate counterfactuals that maintain the
unusual or unexpected event while nonfinders generate counterfactuals that undo the
unusual or unexpected (i.e., discount it).
Whether an unusual event is maintained or discounted directs the course of how the
rest of the counterfactual thought is constructed (see Figure 2); however, it is not the only
factor that influences construction.
Counterfactual Construction. Essentially, there are two ways to construct counterfactuals or any mental simulation (Kahneman & Tversky, 1982): working backward or
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ENTREPRENEURSHIP THEORY and PRACTICE

Winter, 2004

541

Market
Situation
or
Event

(keep the unusual)

Elaborative Counterfactual
Thinking

Situation / event
is surprising,
unexpected,
unusual or
anomalous

Use unusual as
starting point,
develop sequence
for possible
resulting outcomes

Develop causal
sequence that
produces unusual
event

(undo unusual / restore normal)

Automatic Counterfactual
Thinking
Discount
the unusual

CF1
CF2
CF3
etc.

Develop Multiple
Alternative
Counterfactual
Causal Chains

Counterfactual Thinking and Opportunity Identification

Figure 2

Estimate
likelihood
of
counterfactual

Low

High

Maintain
Status Quo
or
Existing
Means-Ends
Framework

Break
Existing
MeansEnds
Framework

Incremental
Opportunities

Imitative
Opportunities

Continue as is

Innovative
Opportunities

working forward. When working backward, one begins by presuming a desired outcome
and then imagines how to alter the sequence of events to lead to that outcome. When
working forward, an actual or proposed starting point is assumed and the individual builds
a sequence of events that can or will result because of that starting point. Whether one
works forward or backward, antecedents (causes) and consequents (outcomes) are mentally changed; these changes can be differences in kind, in number, in degree, in timing,
and so forth.
Psychologists have observed that constructing counterfactuals appears to be governed
by three categories of constraints (Seelau et al., 1995). One category of constraints is the
individuals understanding of natural and social laws (Read, 1987; Olson et al., 1996).
After all, counterfactual thinking would have little value as a preparatory function if one
could not determine causal antecedents; causality would be hard to identify if mental simulations did not generally follow the laws of physical and social worlds. However, another
important category of constraints concerns ones purpose for doing counterfactual thinking (Olson et al., 1996). If one is looking to improve performance, then one will concentrate on those antecedents and outcomes that can be personally controlled or
influenced rather than alter antecedents that enable pigs to fly. Conversely, if ones
purpose is to write science fiction-fantasy, then one might begin by constructing counterfactuals that explain how and why pigs can fly. The third category of constraints
involves availability, or the ease with which one can call to mind possible antecedents,
sequences, and outcomes (Johnson & Sherman, 1990; Kahneman & Tversky, 1982;
Seelau et al., 1995). Psychologists tend to view availability as a function of salience,
recency, or familiarity. Familiarity includes the level of ones knowledge regarding the
normal causal chain (existing means-ends framework) and the event. The more one
knows, the more familiar it is and hence the more available it is.
If, as Kirzner suggests, alert entrepreneurs not only detect the signals of change earlier
than other people, but also interpret those signals differently and draw different conclusions about their implications, it would seem likely that a major point of difference
between those who identify innovative opportunities and those who do not can be found
in the kinds of counterfactuals they construct in order to account for the exceptional or
the unusual.
Proposition 5: Opportunity finders generate forward counterfactuals based on maintaining the unusual or unexpected event; nonfinders do not.
Another observed behavioral regularity in the generation of counterfactuals is that
action is more likely to be changed or altered than inaction (Kasimatis & Wells, 1995;
Markman et al., 1995; Roese & Olson, 1995a; Seelau et al., 1995). In addition,
antecedents perceived to be controllable are more likely to be altered than antecedents
perceived to be uncontrollable. Furthermore, antecedents that are perceived to be dynamic
or fluctuating are more likely to be altered than antecedents perceived to be static (Roese
& Olson, 1995b). Finally, there appears to be a preference to undo the antecedents that
appear early in the causal chain (Roese & Olson, 1995b; Wells, Taylor, & Turtle, 1987).
Relative to the opportunity identification process, it would seem most important that
the individual correctly identifies the causal chain (Wells & Gavanski, 1989), particularly
the causally potent antecedent (Roese & Olson, 1995b, p. 171). As noted earlier, counterfactual thinking can be particularly useful in this regard because creating counterfactuals can assist us in developing our ideas about how elements are connected and how
results can arise. Counterfactuals can alert us to the possible operation of dynamics and
pathways we would be prone to ignore (Jervis, 1996, p. 310). Therefore, counterfactual
thinking can improve veridical perception and veridical interpretation.
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ENTREPRENEURSHIP THEORY and PRACTICE

But in order for this heuristic tool to work effectively, it appears we must construct
numerous counterfactuals and test many different causal alternatives. Evidence suggesting this comes from the Farris and Revlins (1989) study about rule discovery in uncertain situations mentioned earlier. Recall their finding that successful individuals generate
many more counterfactuals than those who are not successful. It appears that those who
generate a large number of counterfactuals do so because they are actually testing different causal hypotheses. In each counterfactual, they vary the dynamics or the pathways,
or something. In contrast, some among those who failed to discover the rules did generate counterfactuals (as opposed to doing nothing) but their counterfactuals did not vary
the causal sequence; it appears they use a confirmatory strategy and merely extend the
range of their first hypothesis. They also stopped their counterfactual generation sooner
than the discovery group, probably because their feedback indicated no further need.
The pattern from these data suggests that we develop insights about causality by
imagining a wide variety of scenarios that are contrary to the facts. However, the key to
uncovering causality does not lie in simply generating a lot of counterfactuals; the key
lies in varying or changing any or all of the antecedents in each new scenario. Then, by
comparing the imagined outcomes over the range of counterfactuals generated, we
develop a sense of where the leverage points (causes) are. The outcome of testing each
antecedent is that one challenges the implicit assumptions; doing so increases the possibility of breaking the existing causal chain, also known as breaking the existing meansends framework.
When applied to the opportunity identification process (see Figure 2), we suggest that
alert entrepreneurs or opportunity finders who accept rather than discount unusual or
unexpected events then have the additional cognitive burden of trying to make sense of
the unexpected. Specifically, they try to imagine the causal sequence leading up to the
unexpected event and try to imagine the consequences of the unexpected. In other words,
alert entrepreneurs discover the new rules of the game when all they are presented with
is an unexpected event. And so it seems likely that alert people construct numerous counterfactuals and multiple causal hypotheses (both backward and forward). As they do, they
develop guesses about the new rules or new means-ends frameworks.
Proposition 6: Opportunity finders test the causal nature of each antecedent in the
implicit causal chain while nonfinders test only one.
Proposition 7: Opportunity finders generate counterfactuals that vary the causal
sequence each time. Nonfinders generate counterfactuals representing different versions of the same causal sequence.
The second aspect of counterfactual construction that may be relevant to the opportunity identification process is how the individual alters antecedents when constructing
counterfactuals. One can add antecedents (mental addition), delete antecedents altogether
(mental subtraction), substitute an equivalent antecedent (mental substitution), change the
amount or degree of the antecedent (addition, subtraction), change the temporal order,
and so on. While most research on counterfactuals involves the psychology of regret and
thus focuses on mental subtraction to undo a negative outcome (Dunning & Parpal, 1989),
there is some evidence that counterfactuals constructed by using mental addition produce
more creative and novel responses because they go beyond the facts of the original scenario (Roese & Olson, 1995b) and tend to include more causal agents. By adding more
causal antecedents, the option set is expanded and there are more means-ends relationships to consider. There is also some evidence that people prefer to generate counterfactuals based on addition when creating simulations of future alternative realities (Dunning
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& Parpal, 1989). In the opportunity identification process, it is likely that people who
develop creative innovative ideas about future products and services show a preference
for counterfactuals constructed using mental addition. Certainly, if one maintains an
unexpected event and tries to make sense of it, it would be more likely that one would
add antecedents in order to produce that unexpected event.
Proposition 8: Opportunity finders construct additive counterfactuals; nonfinders
construct subtractive or substitutional counterfactuals.
Kahneman and Tversky (1982) note that in addition to mental addition and subtraction, one needs to look at the probability of the antecedents. They speculate that most
people engage in what they term downhill counterfactuals, that is, most people subtract unlikely antecedents. Rarely, do people construct uphill counterfactuals, that is,
introduce unlikely or surprising events. It may be possible that opportunity finders not
only increase or add more causal antecedents, but because they have run scenarios that
challenge existing assumptions, they may be willing to consider adding unlikely causal
antecedents.
Proposition 9: Opportunity finders are more likely to generate uphill counterfactuals; nonfinders are more likely to generate downhill counterfactuals.
Actually, if we pause to think about what unlikely or surprising events may look like
in the context of identifying entrepreneurial market opportunities, uphill counterfactuals
may not be as strange as they sound and perhaps not that rare. Consider this example: a
private practice nurse is in line at a bank waiting to deposit office receipts. While waiting
she can see that the bank teller has complete account information at his/her fingertips
a normal, unsurprising fact for a bank. She wonders why doctors and nurses do not have
such access in their exam rooms and imagines what would happen if they did. One of
her first reactions is probably that computers in exam rooms are highly unlikelythe
impersonal quality computers symbolize violates a norm for medical care.
The main point of this example is that technology transfers usually appear unusual
or unlikely until they happen. Nevertheless, it was possible for the nurse to construct an
uphill counterfactual about her industry. The second point of this example concerns how
the nurse evaluates her unlikely counterfactual. She has several choices: dismiss it immediately as unlikely, fantasize about its feasibility someday in the future, or construct
another counterfactual in which the outcome (computer stations in every medical exam
room) is a given. In order to maintain the unusual outcome, she must then mentally construct at least one causal sequence that would lead to acceptance of computers in patient
exam rooms (e.g., doctors talk rather than type). For each counterfactual in her imagination process, she always has at least three evaluation choices; how she evaluates her
counterfactuals will impact her ability to generate multiple competing hypotheses, break
means-ends frameworks, or find innovative market opportunities.
Counterfactual Evaluation. Counterfactuals are evaluated for their plausibility, their
likelihood, and their result: does the counterfactual produce a better, same, or worse alternative when compared to the prompting reality (whether normal or unexpected). It
appears that most people do not do a thorough job of evaluating plausibility (Dunning &
Madey, 1995) although counterfactuals that do not conform to natural law are summarily rejected (Read, 1987).3 Kahneman and Tversky (1982) believe that the plausibility of
3. Unless, of course, ones purpose is to contradict natural laws.

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a counterfactual is judged on the perceived weakest link in the causal chain, not on the
total number of links in the event chain nor in the complexity of the steps. Unfortunately,
there is no empirical evidence to support or refute this belief.
The evaluation of the likelihood of a counterfactual is better researched and highlights a need to distinguish among different aspects of cognitive work. One aspect
involves availability, that is, the ease or difficulty of imagining; availability heavily influences estimates or judgments of likelihood. If alterations are not easily available, that is,
one cannot imagine how to undo and redo an event scenario, then the event is judged to
be highly likely. However, if it is easy to imagine how to change a scenario (alterations
are available), then it appears that the simple act of being able to imagine changes
increases the perception of their likelihood as causally potent antecedents (Fiske, 1993;
Johnson & Sherman, 1990; Kahneman & Miller, 1986; Koehler, 1991). However, as one
then mentally simulates these antecedent options, one tests likelihood even further. If one
imagines many possible alternatives to the original causal scenario, yet every imagined
alteration appears to lead to the original scenario outcome, then the outcome is perceived
to be highly likely and probably inevitable (Dougherty, Gettys, & Thomas, 1997).
However, if each imagined alternative leads to a different outcome, then the perceived
likelihood of any particular change is judged to be very low.
Another aspect of cognitive work that influences evaluation of the likelihood is the
depth to which the counterfactual is elaborated. Many people stop constructing the counterfactual once they imagine the potent cause and the end result. However, taking that
particular counterfactual further by imagining all the intermediate steps leading to the
counterfactuals outcome requires more cognitive work. It appears that the more elaboration one does to construct the intermediate steps leading toward the counterfactuals
outcome, the higher the perceived likelihood of that outcome (Kahneman & Tversky,
1982).4
Relative to the opportunity identification process, likelihood estimates play two roles.
First, the estimates indicate whether it is even possible to break the means-ends framework. If every imagined alternative leads to the same outcome (high likelihood), then
that particular means-ends framework is inevitable and cannot be broken. Conversely,
when imagined alternatives have low-likelihood estimates, then the existing means-ends
framework is merely a useful social convention that can be brokenat least in the ways
just imagined. The second role comes into play when people decide what to do with the
low-likelihood counterfactuals they generate; these counterfactuals may be analogous to
competing hypotheses that Farris and Revlin found to be important in the discovery
process. Research indicates that the typical person has a bias toward having a single plausible and likely counterfactual scenario rather than having several (Dougherty, Gettys, &
Thomas, 1997; Kahneman & Tverskey, 1982). The contrast of this behavioral tendency
with the behavior of rule/pattern discoverers (who had many competing causal hypotheses) suggests one behavior that may promote the identification of market opportunities.
Proposition 10: Opportunity finders are less likely to reject the seemingly lowprobability counterfactuals than are nonfinders.
Preliminary evidence from an experiment involving opportunity identification (Gaglio,
1999) suggests that nonfinders quickly reject their counterfactuals as implausible, unfea4. The mental construction of the intermediate steps in a causal chain is also known as a process simulation, (Taylor & Pham, 1996) which differs from an outcome simulation or imagining only the end result.
Evidence indicates that people who construct process simulations are more effective and successful in achieving their goals (Cratty, 1984; Taylor et al., 1998).

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sible, unlikely, or difficult to do, while opportunity finders retain their counterfactuals
and use additional counterfactual thinking to undo and redo the problematic parts. Weber
(1996) cautions that when using counterfactuals to generate alternatives, one should not
think too much about plausibility or likelihood because the point of the exercise is to
blunt biases arising from the habitual use of the existing means-ends framework; this
advice is remarkably similar to the first commandment of brainstorming: thou shalt not
judge (deBono, 1978).
Proposition 11: When producing impractical or unfeasible counterfactual outcomes,
opportunity finders engage in additional counterfactual thinking that addresses the
feasibility; nonfinders reject the counterfactual entirely.
The evaluation of the desirability and perhaps the feasibility of any given counterfactual depends very much on the individuals perceptions and feelings about what the
counterfactual is being compared to, that is, the standard or anchor used (Roese, 1997).
However, Kahneman, and Miller (1986) point out that these anchors or norms are recalled
on an ad hoc basis; this suggests that the comparison process depends on the availability of anchors and norms, as well as on the availability of counterfactuals. To complicate
matters further, the generated counterfactual may itself become the anchor or standard
for comparison (e.g., this is how it should be).
Very little is known about how anchors, norms, or standards are selected, although
psychologists have been able to demonstrate the existence of biases based on framing
effects (Dunning & Madey, 1995; Dunning & Parpal, 1989) or individual differences
such as personality (Boninger, Gleicher, & Strathman, 1994; Kasimatis & Wells, 1995;
Markman et al., 1993). Relative to the opportunity identification process, Johnson and
Sherman (1990) demonstrate that when thinking about the future, the past and present
act as such powerful anchors that they constrain counterfactual thinking; people expect
the future to be too much like the present or the past. Recent experiences with the .com
bust would suggest otherwise; people expected the near future to be radically different
than the presentthe Internet was going to radically change every aspect of everything
and it has yet to be so thorough. Perhaps the key insight is that anchors can bias our
assessments about the impact and timing of change in either direction: we underestimate
or overestimate. However, Kirzner (1979, 1985) argues that these are precisely the kinds
of mistakes that alert entrepreneurs do not make because they accurately infer implications (veridical interpretation). This claim is not entirely without foundation as Galinksy
and Moskowitz (2000) report that they were able to either bias or de-bias the causal attributions based on the kind of counterfactual used to prime their subjects for the attribution task. It is easy to see how one might avoid biasing anchors when generating and
evaluating counterfactuals concerning the past or present; it is less clear how one can
avoid mistaken estimates about the future. Nevertheless, it does represent an area for
future research.
Proposition 12: Opportunity finders are less influenced by biases such as anchoring, adjustment, or framing effects than nonfinders.
Mind Bending and Frame Breaking. Cognitive psychologists (e.g., Fiske & Taylor,
1991; Tversky & Kahneman, 1974) tend to emphasize the ways in which reasoning and
imaging do not follow the precepts of normative decision making, that is, rationality.
Consequently, they focus on documenting and illustrating the ways in which heuristics
and biases interfere with normative decision making and this leads to an unintentional
tendency to equate usefulness and accuracy. Scholars in other areas of psychology and
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in other disciplines are less concerned with the truth or practicality of generated counterfactuals (Weber, 1996; Jervis, 1996). Counterfactuals are evaluated on whether they
challenge assumptions, uncover potential underlying causes, generate useful questions,
or raise provocative hypotheses about causality and intervening antecedents (McGuire,
1997). In this context, the conscious or unconscious purpose of counterfactual thinking
is to break the mind set or means-end framework. It is in this spirit that this article is
written and the spirit with which opportunity finders play with counterfactuals as they
think and reason.

Implications and Future Research Directions


The purpose of this article is to outline the ways in which cognitive heuristics, such
as mental simulations and counterfactual thinking, may drive the opportunity identification process and by extension, to better understand how entrepreneurs may think and
reason. The propositions offered in this article not only develop theory but also represent
a challenging research agenda for entrepreneurship investigators. In this instance, investigators start with a distinct advantage because valid operational definitions of simulations and counterfactuals have already been identified (Roese & Olson, 1995b) and in
most cases, rely on natural language cues (e.g., if only, at least, if . . . then, what
if, even if, and so on). As such, counterfactual thinking and mental simulations represent empirically definable and measurable features. With the right methodology, in
which entrepreneurs do the thinking rather than recall previous experience (Ericsson &
Simon, 1994; Gaglio & Katz, 2001), it becomes possible to punch a hole in the black
box regarding the cognitive work associated with the opportunity identification process
and to test the assertions made by the theory of entrepreneurial alertness. The area of
opportunity identification can move beyond the descriptive phase and begin to consider
questions about dynamics and contingencies. By looking at the number of counterfactuals, the kinds of counterfactuals constructed, the norms or anchor points used for comparison, the content, and so forth, we can develop a better understanding of how
entrepreneurs think and reason, which is the first step toward developing a theory of entrepreneurial cognition.
While the propositions outlined are a rigorous application of the cognitive psychology regarding mental simulation and counterfactual thinking, they do not represent all
the ways in which these cognitive tools may be used in the opportunity identification
process, let alone the other ways in which these heuristics facilitate entrepreneurial thinking. The process and direction of mental play is virtually limitless and no single article
or single study can accurately represent the full depth and range of these kinds of cognitive activities. Nor do these propositions represent all that is needed to advance our
understanding of the opportunity identification process or entrepreneurial cognition. Over
time, scholars need to incorporate many other variables, such as motivation and affect;
these two factors exert tremendous influence on attention and information processing, but
are rather neglected in the cognitive perspective. Equally important is examining how
these processes work in the context of the other forms of intelligence; cognition is not
limited to the verbal modality but much of the study of cognition and entrepreneurial
cognition currently is.
Nevertheless, studying the role of mental simulations and counterfactual thinking in
the context of the opportunity identification process has the potential to extend cognitive
theory in both entrepreneurship and psychology by shifting the focus to the positive
aspects of these heuristics and shortcuts. While it is extremely important to acknowledge
Winter, 2004

547

the biases and errors these heuristics can produce, it is equally important that investigators do not themselves have a biased view. Counterfactuals and mental simulations have
tremendous value in helping human beings create a better future, not only by correcting
past mistakes, but by imaging even more desirable futures. After all, this is one of the
most attractive features of entrepreneurship; it should be celebrated in theory and research
and our insights shared with our psychology colleagues in order to advance their own
theories.
Should these propositions demonstrate empirical validity, their implications extend
beyond theory to practical training advice. Potential entrepreneurs are frequently admonished to be creative! and to think outside the box!two intimidating phrases guaranteed to produce mental paralysis. Counterfactual thinking and mental simulations are
two cognitive tools that help break the box, not just think outside it. These tools are easy
to teach and easy to adapt to any given situation. The evidence reviewed in this article
suggests that teachers and trainers should emphasize constructing counterfactuals that
test many alternative causal sequences and they should explicitly point out that counterfactual thinking should be directed precisely to those simulation outcomes that seem
impractical or unfeasible. These directives can help develop the veridical perception
and veridical interpretation skills that facilitate testing and challenging means-ends
frameworks.
It should be evident from the range of articles in this special issue that the area of
entrepreneurial cognition represents a wide and deep research stream ready to plumb. It
is hoped that this article prompts a fruitful line of research and debate that sharpens our
theories of entrepreneurial cognition, opportunity identification, and entrepreneurship in
general.

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The author gratefully acknowledges the insightful critiques provided by the anonymous reviewers, the
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Connie Marie Gaglio is a professor at San Francisco State University at the Ohrenschall Center for Entrepreneurship, College of Business, Department of Management.

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